Mid-Morning Look

Thursday, October 27, 2022

U.S. stocks rebounding amid early outperformance in Smallcaps as the Russell 2000 rises around 1% (after leading yesterday) and the Dow Jones Industrial Average rises a 5^th straight day, up over 12% MTD, its best monthly return since 1987 if holds – boosted by better earnings results from CAT, MCD, HON, and MRK this morning (and ahead of AAPL earnings tonight). The S&P is higher as strength in energy, financials, utilities, materials offset the weakness in communications/tech, driven by another disappointing result last night (META) and ahead of AAPL and AMZN results tonight. Economic data favorable for markets as the U.S. economy expanded at a 2.6% annual rate in the third quarter, topping views for a 2.4% rise, and ending the streak of back-to-back contractions that raised recession fears. Though pundits note net exports contributed 2.8% to 3Q22 GDP, most since 3Q80 (unlikely to persist as positive driver). The standout part of the data was lower inflation readings – Q3 PCE price index +4.2% vs. Q2 +7.3% and core PCE +4.5% (in-line with ests and down from +4.7% in Q2; Q3 Y/Y PCE price index +6.3% (vs. Q2 +6.6%), core PCE +4.9% (vs. Q2 +5.0%) – helping boost market sentiment for the Fed to hike rates 75-bps next week, but then hopefully move to a more “wait-and-see” approach. META tumbles -20% on elevated ‘23 CAPEX/Opex guidance but other tech names with good results (FLEX, KLAC and NOW). The ECB hiked interest rates as expected by 75bps. Treasury yields making new lows, helping boost stocks as the 10-yr down -6 bps to 3.955% and 2-yr -4.7 bps to 4.37%.

Economic Data

·     Q3 GDP (initial estimate) +2.6% vs. +2.3% consensus and -0.6% in Q2; inflation data points of GDP report better as Q3 GDP deflator +4.1% vs. est. +5.3% and vs. Q2 +9.1%; Q3 PCE price index +4.2% vs. Q2 +7.3% and core PCE +4.5% (in-line with ests and down from +4.7% in Q2; Q3 Y/Y PCE price index +6.3% (vs. Q2 +6.6%), core PCE +4.9% (vs. Q2 +5.0%)

·     Weekly Jobless Claims rose to 217K from 214K last week and below est. 220K; the 4-week moving average rose to 219,000 from 212,250 prior week; continued claims rose to 1.438M from 1.383M the prior week (and est. 1.388M) and US insured unemployment rate unchanged at 1.0%

·     September Durable Goods Orders rose +0.4% vs. +0.6% consensus and +0.2% prior (revised from -0.2%); Sept Durables ex-transportation orders -0.5% (vs. est. +0.2%) vs. Aug unchanged and Sept Durables ex-defense orders +1.4% vs Aug -0.3% (prev -0.8%). Sept nondefense cap orders ex-aircraft -0.7%, (vs. est. +0.5% vs. Aug +0.8% (prev +1.4%)

Sector Movers Today

·     Semiconductors: Samsung (SSNLF) operating profit fell to 10.85 trillion won ($7.7 billion) for the July-September quarter, from 15.8 trillion won a year earlier, but in-line w views; KLAC posts a beat-and-raise quarter like others in the chip-equipment sector as long-term goals underscored – follows better results from ASML and LRCX last week in the equipment sector; WOLF shares tumble over -20% early after disappointing December quarter revenue guidance, softer margin guidance through F2024 and increased near-term CAPEX with no clear plan on source of funds; PI reported strong Q3/22 results ahead of guidance and estimates, primarily driven by strong demand and execution with upside mainly from endpoint ICs and reader ICs; STM shares slide post earnings; in HDD space, WDC follows up STX results yesterday same way, missing and guiding lower as sees Q2 revs $2.9B-$3.1B vs. est. $3.5B after Q1 EPS miss (revs beat); UBS downgrades STX to Hold from Buy and cuts its PT to $55 from $85 after results/news yesterday.

·     Retailers: AMZN earnings after the close tonight; SHOP surges on smaller than expected Q3 EPS loss and revs $1.37B vs. est. $1.34B saying monthly Recurring Revenue increased 8% to $107M, Gross Merchandise Volume increased 11% to $46.2B, up $4.4B over Q3; VFC reported a top- and bottom-line miss, and guided down again, less than a month after just lowering estimates; SNBR tumbles after the mattress retailer reported 3Q sales and EPS above expectations due to better-than-expected deliveries and cost cutting, but lowered guidance due to a weaker demand and continued supply chain inefficiencies; BOOT Q2 sales, margins and EPS above views but forward outlook slightly overshadows the strong reported quarter, with 3Q EPS set 15% below expectations and full-year sales and EPS guidance lowered 1% and 2%

·     REITs: DLR had a bit of a mixed Q3 — record leasing, particularly with U.S. scale deals, was offset by the impact of FX / higher rates in its financials. Same-store cash NOI metrics worsened to -7.2% y/y due to both FX and higher opex; GTY in-line Q3 FFO of $0.54 and tweaked its FY22 AFFO guidance higher by 0.7% at the midpoint; INVH reported disappointing 3Q22 results, which included a 3Q22 core FFO miss, and management decreased 2022 guidance by 2.4% at the midpoint; PLD 3Q showed strong 9.3% cash SSNOI growth, 97.8% occupancy, and an increase in rent change to nearly 60% and rent change on lease signings in the quarter grew to 84%; SITC 3Q results were better than expected, driven by steady operational improvements and significant enhancements to the balance sheet; UDR 3Q22 FFOA beat, and a 2022 guidance increase of ~1% at the midpoint while same-store revenue growth accelerated in 3Q22 and was better than Keybanc ests; MPW in-line Q3 FFO of $0.45 as revs fell -9.8% y/y to $352.3M vs. est. $394M

·     Consumer Staples: MO said it is forming a partnership with Japan Tobacco Group to develop and sell heated tobacco devices in the U.S. and abroad. The move pits Altria against its former strategic partners, PM, and Juul Labs Inc. https://on.wsj.com/3Fi7ERL ; Separately, MO 3Q adj EPS $1.28 vs est. $1.30 on revs $6.55B vs est. $5.59B; guides FY adj EPS $4.81-4.89 vs est. $4.85, says expect adverse macroeconomic and geopolitical landscape to continue to impact business in near-term; retain 35% economic stake in JUUL but exploring all options; in food, KHC Q3 adj EPS $0.63 vs. est. $0.56 and sales rose 2.9% to $6.5B vs. est. $6.27B; qtrly organic net sales increased 11.6% y/y; in beverages KDP reported in-line Q3 results, while BUD reported Q3 EPS and Ebitda beats and raised the bottom end of its organic Ebitda growth range to 6%-8% from 4%-8%

Stock GAINERS

·     CAT +8%; Q3 adj EPS $3.95 vs. est. $3.18; Q3 revs rise 21% y/y to $14.99B vs. est. $14.43B; increase in sales volume in qtr driven by impact from changes in dealer inventories, higher sales of equipment to end users

·     CMCSA +7%; top and bottom line beat for Q3 (EPS $0.96/$29.85B vs. est. $0.90/$29.6B), Video Net Change -561,000 and High-Speed Net Change +14,000 – said 4% cable revenue decline offset by 6% price hike

·     MRK +2%; Q3 adj EPS $1.85 vs. est. $1.71; Q3 revs $15B vs. est. $14.08B; raises FY22 adjusted EPS view to $7.32-$7.37 from $7.25-$7.35 and boosts FY22 revenue view

·     NOW +14%; posted strong 3Q22 results on a constant currency basis, bouncing back from largely disappointing results in 2Q22 – reported 3Q cRPO growth of 25% cc, above guide of 23.5%

·     PI +18%; reported strong Q3/22 results ahead of guidance and estimates, primarily driven by strong demand and execution with upside mainly from endpoint ICs and reader ICs

·     SHEL +4%; posts Q3 profit of $9.45B, down from prior qtr due to weaker refining and gas trading, as it announced plans to sharply boost its dividend and announced plans to buy $4B of stock

·     SHOP +16%; on smaller than expected Q3 EPS loss and revs $1.37B vs. est. $1.34B saying monthly Recurring Revenue increased 8% to $107M, Gross Merchandise Volume increased 11% to $46.2B

·     TDOC +7%; reported a bottom-line beat with revenues of $611M roughly in line with consensus of $610M, but adjusted EBITDA of $51M that handily topped consensus of ~$41M

Stock LAGGARDS

·     ALGN -20%; as Q3 sales were about 8% below consensus as continues to deal with macro headwinds, which led to adjusted EPS of $1.36, or $0.80 below consensus

·     AMED -14%; as posts its 7^th Q3 top-line miss in last 8-quarters according to William Blair and EBITDA missed despite substantial adjustments

·     CS -16%; unveiled a strategic plan that will see the bank undertake a multi-billion-dollar capital raise, a carve out of its investment bank and thousands of job cuts

·     META -18%; after the Facebook parent gave a disappointing revenue forecast and asked investors for patience as costs soared 19%; Morgan Stanley, Cowen, and KeyBanc downgraded the stock

·     SNBR -29%; reported 3Q sales and EPS above expectations due to better-than-expected deliveries and cost cutting, but lowered guidance due to a weaker demand and continued supply chain inefficiencies.

·     STM -6%; Q3 EPS $1.16 vs. est. $1.04; Q3 revs $4.32B vs. est. $4.22B; said Q3 inventory was $2.38B, compared to $1.97B in the year-ago quarter; days sales of inventory at quarter-end and in the year-ago quarter were 96 days

·     WOLF -25%; after disappointing December quarter revenue guidance, softer margin guidance through F2024 and increased near-term CAPEX with no clear plan on source of funds

·     WST -19%; as 3Q revs miss by 6%, lowers FY guidance